Small Business Financing 101: How Commercial Real Estate Loans Can Help You with Your #LocationGoals

Katie Fleming

Katie Fleming

Co-founder and COO of Owner Actions

A row of retail storefronts, any one of which can be attained with a commercial real estate loan

Disclaimer: This article was written to help you evaluate your commercial real estate loan options. It should not be construed as financial guidance. Before applying for any form of financing, you should speak with a banker to weigh the risks and costs.

 

Do you need a site for your small business? If so, you may be considering a commercial real estate loan to help you cover the costs. In this article, we’ll explain what a commercial real estate loan is, and we’ll provide you with an overview of some of the most common kinds of commercial real estate loans that could help you attain your goals.

But first, let’s start with the basics.

 

What is a commercial real estate loan?

A commercial real estate loan is an arrangement you make with a lender to buy or improve upon a property you’ll use for business purposes. Most commercial and community banks, credit unions, and online lenders offer an assortment of commercial loan programs to help you purchase the property that’s needed to run a business.

 

How do commercial loans differ from personal real estate loans?

There are similarities between the two. Both require an involved application process, an assessment of the property’s value and condition, and a set of terms the borrower must agree to in order to proceed.

There are also some notable differences:

  1. Cost. Commercial real estate loans typically require higher down payments. Most also charge higher interest rates than personal real estate loans.
  2. Term. The loan term for a personal residential loan is usually 15 or 30 years, but terms tend to be shorter in commercial loans. Most commercial real estate loan terms range from 5 to 20 years, and the amortization period may be longer than the loan term.
  3. Options. While borrowers seeking personal real estate loans find relatively few loan options—and among the options, little variance in terms or conditions—commercial borrowers have a wider range of choices.

 

What kinds of choices?

Most commercial borrowers choose one of the following loan options:

 

SBA loan

If your business meets certain qualifications, you could consider an SBA loan to finance your real estate costs. Named after the Small Business Administration that guarantees them, SBA loans allow owners to finance a large portion of their startup costs, working capital expenses, equipment needs, and building acquisition or improvements.

The SBA offers three kinds of 7(a) loans to owners to cover up to 90 percent of their startup costs, working capital, and equipment needs. They also offer 504 loans for the purchase of existing buildings, the purchase of land or land improvements, the construction of new facilities, the renovation of existing facilities, and the purchase of long-term machinery.

You can learn more about SBA loans and their requirements in this guide:

 

Commercial mortgage

Another option to consider is a commercial mortgage. This form of loan is often used to purchase an owner-occupied office building, retail center, warehouse, or other commercial property.

Commercial mortgages differ from residential mortgages in both terms and the amortization period. Often, commercial mortgage terms range from 5 to 20 years, and the amortization period extends past the term of the loan. Loans structured this way usually require a borrower to make monthly installment payments for the life of the loan and a final balloon payment.

These loans sometimes require higher down payments than SBA-backed options. They can also be slightly more difficult to attain. In addition, many lenders require borrowers to guarantee the loan, especially if the borrower is an individual or an entity with no borrowing history.

If you are interested in attaining a commercial mortgage, you should speak with a bank or credit union lender in your area or visit an online lender like Commercial Loan Direct.

 

Commercial bridge loan

Some lenders offer short-term commercial bridge loans, or gap financing, to business owners who want to buy a commercial property and refinance it into a mortgage at a later date. Most commercial bridge loans offer terms between 6 and 36 months and require a down payment of at least 10 percent of the loan to value, but terms can vary greatly by lender. You may find options for interest-only payments and nonrecourse loans in which the borrower does not have to guarantee the loan, which can be attractive options for short-term cash needs.

To learn more about this option, check out this guide:

 

Commercial hard money loan

Some non-bank lenders offer commercial hard money loans that are secured by the borrower’s property. This short-term option allows owners to buy a commercial property quickly, with flexible terms, and often without checks on their credit history. However, the interest rate on these loans is usually high, so many borrowers view these loans as a last-resort option and refinance them into a mortgage at a later date.

Some online lenders offer hard money loans, but most owners turn to friends, family members, or local real estate investors to secure this form of funding. Be sure to evaluate the terms of a commercial hard money loan carefully before proceeding with this option.

 

Which option should I choose?

There is no one-size-fits-all solution, but these guidelines can help you make a selection:

 

If you have owned your business for at least two years and can demonstrate a pattern of income generation, you may want to choose an SBA loan because it tends to have the most favorable terms and the lowest down payment requirements.

Important note: This option is usually reserved for applicants who have exhausted other sources of financing.

 

If you have enough cash on hand to make a sizeable down payment (often 20 to 30% of the purchase price) and your business has good credit, you may choose a commercial mortgage that offers favorable terms.

 

If you need to attain cash quickly to close on a property, you might choose a commercial bridge loan, which generally provides faster financing than any other option. After closing, you may want to look into a longer-term option with more favorable terms.

 

If your business has insufficient or less-than-perfect credit, you could choose either a commercial bridge loan or a hard money loan to cover the costs and make a plan to pursue either an SBA loan or a commercial mortgage when your business’s credit improves.

 

I’m not sure about these options. Do lenders offer other choices?

If these options aren’t right for you, you might consider non-commercial sources of lender financing. These include:

 

Home equity loan

If you own a home or other properties, you may be able to borrow the difference between what you owe and what the property is worth. Many lenders offer home equity loans with favorable terms and minimal restrictions on how the funds can be used. The drawback is that these loans require you to put up your house as collateral; if you fail to repay a home equity loan, you could lose your home.

Be sure to speak with a banker before considering a home equity loan to cover your commercial real estate costs.

 

Cash-out mortgage refinance

You may consider refinancing a mortgage you have on your home or another property to secure the funds you need. With a cash-out mortgage refinance, you have the option to pocket the difference between what you owe on a property and 80 to 95% of the property’s full appraised value.

Rates and closing costs can be higher with this option than a traditional refinance, so this option should be considered carefully before moving forward. Speak with a banker before considering a cash-out mortgage refinance to cover your real estate costs.

 

Second mortgage

You may also consider taking out a second mortgage on a property you owe to cover your real estate costs. Second mortgages are structured very similarly to a traditional home mortgage with clear repayment terms and interest requirements.

It can be difficult to find a lender who’s willing to provide this type of financing. Most banks view second mortgages as higher-risk investments of their money, so those that offer them tend to charge higher interest rates than they might for a traditional home mortgage.

You should speak with a banker before considering a second mortgage.

 

Term loan

Many business owners apply for term loans to cover some of their real estate acquisition or improvement costs. Term loans, which can be attained through a bank, credit union, or online lender, generally have favorable terms and long repayment schedules, but they can be difficult to qualify for, especially for borrowers with less-than-perfect credit.

To learn more about term loans and their qualifications, read our guide, Small Business Financing 101: Term Loans.

 

For more financing options, check out Your Go-to Guide to Raising Capital for Your Small Business.

 

Are you ready to connect with a banker to learn which of these options is right for you? Take a look at these options:

 

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Commercial Loan Direct

Business Loans Made Simple

Commercial Loan Direct is a no-frills lender that provides conventional loans, SBA loans, construction loans, bridge loans, and other forms of financing to help business owners go after their goals. Many owners start with CLD's Commercial Loan Finder, a tool that points them in the direct of loan programs that best suit their needs. Interested in learning more? Visit their website through the link below to get started.

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GoKapital

Quick Business Loans to Help All Businesses Grow

With their simple, streamlined two-minute application, GoKapital makes it easy to apply for financing. GoKapital offers a wide range of financing options. These include business cash advances, equipment financing, unsecured loans, and no credit check loans. They also offer more traditional loan products that, on average, close in two-to-four weeks. Ready to explore their loan options? Click the button below to get started.

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Square Banking

Money to Keep Your Business Moving Forward

Square offers checking accounts, savings accounts, and loan products exclusively to owners who process with Square. Their loans, which are backed by your card sales through Square, charge a flat fee (no interest) and are repaid automatically with a percentage of your daily card sales. Would you like to learn more about this new way to finance your expenses? Follow the link below to explore the offer.

 

What’s next?

After exploring your financing options, you can take on other essential parts of starting your small business. Whether those tasks include hiring employees, building your website, or planning your grand opening, we’ve got you covered. Log into your owner’s portal for articles and advice that can help you with every action you need to take.

Want to take on other tasks?

Come see the free step-by-step guide business owners love.

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